H&E Equipment Services Inc (HEES) 2017 Q4 法說會逐字稿

Good morning, and welcome to the H&E Equipment Services Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Evan. And welcome to H&E Equipment Services conference call to review the company's results for the fourth quarter and year ended December 31, 2017, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com.

Please proceed to Slide 2. Conducting the call today will be John Engquist, Chief Executive Officer; Brad Barber, President and Chief Operating Officer; and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to Slide 3. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note. This call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and also include in the risks described in the risk factors in the company's most recent annual reports on Form 10-K and other periodic reports. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

With that stated, I'll now turn the call over to John Engquist.

Thank you, Kevin. Good morning, everyone. Welcome to H&E Equipment Services Fourth Quarter 2017 Earnings Call. On the call with me today are Leslie Magee, our Chief Financial Officer; Brad Barber, our President and Chief Operating Officer; and Kevin Inda, our Vice President of Investor Relations. I'll direct my comments this morning to our fourth quarter results, our business and overall market conditions, and then Leslie will review our financial results for the quarter and year. When Leslie concludes, I'll have a few brief comments, after which we'll be happy to take your questions.

Please proceed to Slide 6. The fourth quarter was exceptionally strong, with both our rental and distribution business delivering solid results. The momentum we experienced during the third quarter in the nonresidential construction markets continued during the fourth quarter. As a result, total revenues increased 20.6% or $50.3 million to $294.7 million in the fourth quarter. Margins were 34.2% compared to 34.6% a year ago due to revenue mix. Adjusted EBITDA grew 15% to $90.7 million compared to $78.9 million a year ago.

For the fourth quarter, we generated net income of $85.9 million or $2.40 per diluted share compared to $12.4 million or $0.35 per diluted share a year ago. We recorded a significant onetime tax benefit in the fourth quarter resulting from the recent tax legislation.

Let me make a few brief comments about our distribution business, specifically new equipment sales, which delivered a 65.9% or $29.6 million increase in total revenues compared to the fourth quarter a year ago. The increase was primarily attributable to nearly a 100% or $19.7 million increase in new crane sales. While we're extremely pleased with almost $40 million in new crane sales during the fourth quarter, we don't believe this is indicative of a total recovery in the crane market, rather largely driven by year-end purchasing decisions. However, we do expect better demand for new cranes in 2018 compared to last year. The increase in new equipment sales was also driven by solid demand for earthmoving equipment, which increased 28.5% or $4.8 million.

Please proceed to Slide 7. With time utilization up 390 basis points to 74.2% for the quarter, we believe there is no debate regarding the positive trends in the nonresidential construction markets. AWP time utilization for the quarter was 76.6%. Demand for cranes increased, and our crane fleet was highly utilized at 77.2%. Dollar utilization grew to 36.2% from 34.3% a year ago, and we achieved positive rates for the third consecutive quarter, up 1% year-over-year and 0.6% sequentially. As a result, rental revenues increased 10.9% to $127.7 million, and rental gross margins increased to 51% from 47.7% a year ago.

Proceed to Slide 8, please. This slide illustrates our expanding nationwide footprint, various regions, branch locations and 18 greenfield sites that we have opened since the beginning of 2013. In November, we opened a new branch in Lynnwood, Washington. We are executing on our strategy of expanding our business through acquisitions with the acquisition of CEC, which was completed in January, and our recently announced acquisition of Rental Inc., which we expect to close late in the first quarter or early in the second quarter. The map depicts the 3 branches in the Denver area we acquired through CEC, bringing our branch count to 6 in Colorado. The Rental Inc. acquisition will give us 5 additional branches located in Opelika and Dothan Alabama; and Fort Walton Beach, Panama City and Tallahassee, Florida, which we expect will significantly improve our ability to serve customers in South Alabama, the Florida Panhandle and Western Georgia, all of which we believe are expansion or recovering markets.

CEC and Rental Inc. represent the types of well-run companies we intend to pursue. We believe they complement our existing business, broaden our geographic footprint and increase our density in existing markets. We are also continuing to expand through our greenfield and warm-start program.

Proceed to Slide 9, please. One of the key takeaways on this slide continues to be our end-user markets, with more than 60% representing nonresidential construction customers. As you can see, the industrial segment is not a material driver of our overall business.

Fleet mix and age are also competitive advantages. Higher returns are driven by a large AWP fleet, which was highly utilized at 76.6%, combined with positive rental pricing. With one of the youngest fleets in the industry at 34.6 months, we can easily age our fleet.

Lastly, energy-related activity continues to improve as a result of significantly higher oil prices from a year ago. The majority of our oil and gas exposure continues to be in the Gulf Coast region at 81%, with Texas alone representing 79% of the Gulf Coast region. In addition to the high levels of exploration activity and increases in production, additional pipeline capacity is required to transport oil and gas to refineries, resulting in a recent surge of pipeline projects.

Proceed to Slide 10, please. The data on this slide should come as no surprise to anyone on this call. Overall, market indicators and conditions are some of the most positive our industry has seen in several years. Leading industry indicators like the Dodge Momentum Index and the ABI forecast solid growth in 2018. The economy is strong. We also believe the recently approved tax plan should encourage additional corporate investment, and any significant infrastructure build would further extend the cycle.

At this time, I'm going to turn the call over to Leslie for the financial results.

Good morning, everyone, and thank you, John. I'll begin on Slide 12 to discuss our financials in greater detail. Our fourth quarter results were solid as we successfully capitalized on the strong demand in our end-user market. For a high-level overview, our total revenues increased 20.6% or $50.3 million in the fourth quarter compared to the same period a year ago to $294.7 million, driven primarily by the strength in both our rental and distribution business. Gross profit increased 19.2% or $16.2 million to $100.9 million from $84.6 million a year ago.

Margins were 34.2% compared to 34.6% a year ago, primarily as a result of significantly higher but lower-margin new equipment sales. Although the revenue shift impacted consolidated gross margins, all operating segments, with the exception of used equipment sales, generated higher gross margins.

Let me now provide more detail underlying the 20.6% top line revenue growth, beginning with rental revenues. Rental revenues increased 10.9% to $127.7 million. And as John pointed out, physical utilization increased 390 basis points, with average time utilization based on OEC of 74.2% for the quarter compared to 70.3% a year ago. Demand for our AWPs was exceptionally strong at 76.6% of OEC, up from 73.1% a year ago. In fact, time utilization increased for all product lines, with cranes up 940 basis points, earthmoving up 130 basis points, lift trucks up 290 basis points and general equipment up 740 basis points compared to a year ago.

Rental rates improved again this quarter, 1% year-over-year and 0.6% sequentially. With strong utilization and rates, our dollar returns increased to 36.2% versus 34.3% last year.

New equipment sales increased 65.9% or $29.6 million to $74.4 million, with improved demand in all product lines. The improvement in new equipment sales was largely due to higher new crane sales, which increased 99.4% or $19.7 million to $39.6 million, and sales of new earthmoving equipment, which increased 28.5% or $4.8 million during the quarter. We believe demand for new equipment increased significantly in part due to year-end purchasing patterns.

Used equipment sales increased 28.8% or $7.2 million to $32.1 million, largely as a result of higher used AWP and earthmoving sales. Sales from our rental fleet comprised 93% of total used equipment sales this quarter compared to 89% a year ago.

Our parts and service segment delivered $42.1 million in revenue on a combined basis, down 1.1% from a year ago.

I'll now move on to a brief discussion of gross profit and margin. Our total gross profit for the quarter was $100.9 million compared to $84.6 million a year ago, an increase of 19.2% on a 20.6% increase in revenue. Our consolidated margins were 34.2% compared to 34.6% a year ago, driven by solid margin performance across all segments.

For gross margin detail by segment. Our rental gross margins for the quarter were 51% compared to 47.7% last year, primarily due to strong utilization and positive rates. Margins on new equipment sales were 11% for the fourth quarter compared to 9.9% a year ago, largely due to higher margins on new crane and earthmoving sales. Used equipment sales gross margins were 31% compared to 31.9% last year. And margins on pure rental fleet-only sales were 32.5% compared with 34.1% a year ago. Parts and service gross margins on a combined basis were 42.4% compared to 41.5% a year ago as a result of higher margins in both segments.

Slide 13, please. Income from operations for the fourth quarter of 2017 increased 34.8% to $40.3 million or 13.7% of revenues compared to $29.9 million or 12.2% of revenues a year ago. The increase in income from operations is primarily a result of higher rental revenues and equipment sales, strong gross margins and solid operating leverage compared to a year ago.

SG&A expenses were 20.5% of revenues this quarter compared to 22.8% a year ago.

Proceed to Slide 14. Net income was $85.9 million or $2.40 per diluted share in the fourth quarter compared to $12.4 million or $0.35 per diluted share in the same period a year ago.

Our effective tax rate declined to a negative 211.7% compared to 26.3% a year ago. We recorded an income tax benefit of approximately $58.4 million during the current quarter compared to income tax expense of approximately $4.4 million a year ago. With the recently enacted Tax Cuts and Job Act, we remeasured our deferred tax assets and liabilities resulting from the decrease in the corporate federal income tax rate from 35% to 21%. This is a onetime benefit.

Please move to Slide 15. Adjusted EBITDA was $90.7 million in the fourth quarter compared to $78.9 million a year ago. And margins were 30.8% compared to 32.3% a year ago, a decrease of 150 basis points primarily due to significantly higher but lower-margin new equipment sales.

Next, Slide 16. SG&A was $60.5 million, a $4.7 million or 8.5% increase over the same period last year. SG&A as a percentage of revenue was 20.5% this quarter compared to 22.8% a year ago. The net increase was largely due to higher labor and benefit costs. Also, branch expansion costs increased $0.9 million compared to a year ago.

Next, on Slide 17. Our gross fleet capital expenditures during the fourth quarter were $51.3 million, including noncash transfers from inventory. And our net rental fleet capital expenditures for the quarter were $21.5 million. Gross PP&E CapEx for the quarter were $6.5 million, and net was $5.8 million. Our average fleet age as of December 31 was 34.6 months.

Cash flow for the fourth quarter was $43.4 million compared to $57.6 million a year ago. We've included a free cash flow GAAP reconciliation in the appendix at the end of the presentation accompanying this.

Next, on Slide 18. At the end of the fourth quarter, the size of our rental fleet based on OEC was $1.4 billion, a 5.2% or $68.9 million increase from a year ago. Average dollar utilization was 36.2% compared to 34.3% a year ago.

Proceed to Slide 19, please. In late November, we closed on an add-on offering of $200 million in aggregate principal amount of our 5 5/8 senior notes due in 2025, which are under the same terms as the $750 million aggregate principal amount of 5 5/8 senior notes that we issued in August of 2017. The $200 million add-on offering priced at 104.25% of par value.

In late December, we increased the size of our ABL facility from $602.5 million to $750 million. And at the end of the fourth quarter, we had no outstanding balance under the amended ABL facility. And therefore, we had $742.3 million of availability at quarter end, which is net of $7.7 million of outstanding letters of credit. As a result, we believe our balance sheet is strong, and our capital structure supports our growth strategy.

Proceed to Slide 20, please. Let me quickly review our full year 2017 results, which we believe reflects solid execution and increased demand in our end-user market. Our total revenues increased 5.3% or $51.9 million to $1 billion in 2017 from $978.1 million in 2016. Gross profit increased 7.2% or $24.3 million to $359.9 million from $335.6 million in 2016.

On average, 2017 rental rates increased 0.2% compared to 2016. And in 2017, time utilization based on OEC was 72.1% compared to 69.7% a year ago.

Our income from operations in 2017 increased 24.5% to $137.9 million or 13.4% of revenues compared to $110.8 million or 11.3% of revenues a year ago but included a $5.8 million of merger breakup fee proceeds, net of merger costs. Excluding these proceeds, income from operations increased 19.3% to $132.1 million or 12.8% of revenue.

Net income was $109.7 million or $3.07 per diluted share compared to net income of $37.2 million or $1.05 per diluted share in 2016. Net income was positively impacted by the onetime benefit due to remeasuring our deferred tax assets and liabilities, resulting from the passage of the Tax Cuts and Jobs Act in December 2017. For the full year, our effective tax rate decreased to a negative 84.8% from 37% a year ago.

Adjusted net income was $124.4 million or $3.48 per diluted share, excluding the merger breakup fee proceeds, net of merger costs, as well as the loss on early extinguishment of debt in the third quarter of 2017.

Adjusted EBITDA for 2017 increased 8.2% to $327.1 million from $302.3 million in 2016. Adjusted EBITDA as a percentage of revenue was 31.8% compared with 30.9% in 2016. We generated $73.1 million in free cash during the year, and we also continued our dividend payment each quarter, with total dividends paid of $1.10 per common share during 2017.

And at this time, I'm going to turn the call back to John.

Thank you, Leslie. Please proceed to Slide 22. To conclude, we delivered very strong results for the fourth quarter, and it was a very positive year overall for our business, highlighted by continued strength in our rental business and improving trends in our distribution business. Many key indicators are pointing towards continuing strength in the nonresidential construction markets in 2018. We have also quickly executed on our stated growth strategy, and we intend to continue to pursue additional complementary acquisitions.

Lastly, we paid our 14th consecutive quarterly cash dividend on December 11 and paid total dividends of $1.10 per share for the year. As always, future dividends are subject to board review and approval each quarter.

At this time, we'd like to take your questions. Operator, please provide instructions.

(Operator Instructions) Our first question comes from Neil Frohnapple from Buckingham Research.

First, can you provide more granularity on the significant increase in the crane business during the fourth quarter? You mentioned year-end purchasing decisions, so is there any way to sort of strip out -- strip that out and give us a sense of underlying performance? And then I guess as a follow-up, can you provide commentary on, I guess, recent quoting and order activity for cranes as a leading indicator for your expectation of higher 2018 sales for this business?

Yes. Look, I think the last call or 2, we have indicated that we've had more quoting activity, and we've seen more interest on the crane side. As we said, we're not prepared to say that what -- the purchasing we saw in the fourth quarter is indicative of a full-blown recovery in the crane market. We're just -- we're not there yet. With that said, we certainly believe demand in 2018 is going to be better than demand in 2017. And so that's kind of where we are, Neil.

Okay. And then I guess some of that quoting activity, John, is it broad-based by geographic region and product line? Or is it still limited to certain product categories within cranes?

Yes. There's probably still weakness in the rough terrain markets. We saw real strength in all terrain markets, some crawler crane activity, but really strength in the all-terrain markets.

Okay, got it. And then one final one for me. You posted higher-than-anticipated incremental gross equipment rental margins in the quarter and, I think, for the full year, were above 60% despite rental rates only being up modestly for the full year. So could you talk about incremental gross margins for 2018, given a more positive rental rate environment? And I guess if you can discuss, sort of excluding the acquisition, which would presumably weigh on the flow-through.

We are expecting kind of a more normalized rental flow-through margins going forward. Just really as you look at utilization and fleet growth, that's really what we're expecting moving forward. In the fourth quarter, they bumped up pretty good because of -- a result of the higher-than-expected fleet utilization, the strong fleet growth. And then also, rates were a piece of that as well.

Okay. And Leslie, what would you characterize as more of a normalized rental flow-through margin?

Normalized incremental rental gross margin rates are about the 50% range.

Next question comes from Seth Weber from RBC Capital Markets.

I wanted to -- couple of questions. I wanted to ask about the acquisitions. You're bringing on about $120 million of acquired fleet, it looks like, which is about half of what your CapEx was this -- in 2017. So how should we think about that? Does that -- is that going to come in -- are you going to buy less new equipment in 2018 because you're acquiring this fleet? Or do you expect to sell some of that fleet? And then secondly, I think it's about $70 million of acquired revenue. Can you give us any indication of where the EBITDA margins for these acquired companies are running, whether they're kind of consistent with H&E margins, above, below? Any help there?

Yes. Well, they're certainly consistent, the margins with H&E margins, and CEC margins are higher because of revenue mix. They're a pure rental play, and they've got exceptionally high margins because it's pure rental. Rental Inc. has a small distribution component, which is a drag on their margins. So their margins are more similar to ours. Seth, we're going to grow our core rental fleet pre-acquisition. We're going to spend some growth capital more than we did last year. I don't want to give you CapEx guidance because we don't do that. But we plan to grow our fleet this year more than we did last year, and that's prior to acquisitions.

Okay, that's helpful, John. So I mean, will you be selling any of the acquired fleet or you're just going to try and fold that into the fleet mix at this point?

We'll fold it into the fleet mix and probably grow their fleet.

Okay, that's very helpful. And then just following up on the prior question on the crane business, I think I asked this question last quarter. But I'm really just wrestling with the lack of growth and -- the disconnect between the parts and service not growing and crane demand increasing. To me, that just seems like that there's a disconnect there. And I'm wondering if you have any opinion on what's going on and when you might expect to see the parts and service business improve.

Seth, I think -- and Brad probably can give you better color than I can. I think it's a timing issue. We're just not getting those major rebuild jobs that we really like. It's a big driver of our parts and service business. And as the crane end markets continue to improve, I anticipate that's going to come.

Yes. So I couldn't really add -- I agree. Look, our opportunities on service/parts, as John stated, a large -- the large portion of those dollars traditionally come through crawler crane rebuilds, and that still remains soft. John spoke a while ago that ATs have really been the brighter spot or were the brighter spot in Q4. And it's probably more of the brighter spots we continue to see quote activity. So until we see a broader recovery on crawler cranes, I think we're going to continue to face headwinds on parts and service growth.

Next question comes from Ross Gilardi from Bank of America.

I just wanted to ask you about pricing. I mean, clearly, you saw some counterseasonal pricing strength in the fourth quarter. Has that continued into the first 6 weeks of 2018?

It has. And it's our expectation that we'll see positive pricing throughout the year. It's -- everybody is running high utilization levels, and the supply and demand is working in our favor. So yes, we're in a solid environment to push pricing.

And then cranes, you characterized the strength as due to year-end buyings. Was that a comment on tax-related buying? And are you seeing the same type of dynamic play out at all with earthmoving and aerials?

Well, no one really owns aerials anymore. That's a pure rental item. But yes, we had a really strong earthmoving quarter. And I think what it tells you is that our customers are making money, and I think they did some year-end tax buying.

Got it. And then what are you seeing from your equipment suppliers on pricing? Are they pushing price to offset steel? And are they getting price?

So -- Ross, this is Brad. It varies. Generally speaking, we've seen 1%, 2% price increase. We've had certain manufacturers be as high as 3%, and probably half of our manufacturers were realizing no increases year-over-year. So it spans. It's not been so much around steel. That's a more current event. And I would tell you that we got our orders in the queue very early with advanced purchase orders. And part of that negotiation was to make sure we could secure 2017 pricing, and we were fairly successful in doing so.

Okay. So if you actually got the order in -- because clearly, a lot of the equipment suppliers saw very strong pickups in their backlog in the fourth quarter. So are you saying if you got the order in before calendar '18 began, you actually got the 2017 pricing?

Well, it's always an individual negotiation. But I would tell you that we were very responsive, and I think it's going to pay a dividend to us in the form of no, to very small price increase.

Our next question comes from Kathryn Thompson from Thompson Research Group.

This is Steven Ramsey on for Kathryn. I was curious to get your thoughts on the specialty side of equipment rental. With lots of players being excited about that particular segment of the market, is this an area you are focused on with greenfields or acquisitions?

It is not. We feel like we've got lots of room to grow our core business. And when you go after the specialty rental businesses, you pay a very high multiple. And when you bring them into your -- when you integrate them into your business, that multiple tend to get -- tends to get homogenized. So we've got lots of room to grow our core business, and that's what we're going to do.

Excellent. And then thinking about energy markets improving, oil and gas markets improving, are you seeing any aggressive shift back to those markets from competitors in rentals? Or are you moving back into those geographies aggressively with fleet?

We are moving back into the shale plays where we have a big presence, like the Eagle Ford and the...

Permian.

And the Permian. We're -- we moved a lot of fleet back in there. Those shale plays are as active they've ever been. And it's just a really, really, really strong environment. Midland would be a good example. I mean, we've got as much fleet in that market as we've ever had, and we're running in the mid-80s on utilization. So...

Yes. Steven, I'd also add, the -- our competitors are doing the same thing, but I would say that everyone's taking a rational approach. And generally speaking, we achieve our highest rates company-wide in the oilfield sector. So I don't think we're dissimilar to our competitors. So ramping it up, it's going well, high utilization, really good rates. And I think our performance would be indicative of the same way our competitors are performing, very rationally and getting nice returns.

Our next question comes from Stanley Elliott from Stifel.

Quick question. When we think about rental rate, and we're -- so we're seeing some nice improvement here over the back part of the year. If we were to just say, kind of holding that constant, looking into 2018, is there a way to kind of categorize what that carryover rate might end up being?

We don't traditionally provide that level. Look, it would certainly be at some level positive. And as John stated earlier, with current utilization running -- currently, it's running -- (inaudible) it's running ahead of the prior year already. We continue to see opportunity to increase rental rates, but we don't provide that calculation.

No, and that's fair. And then when thinking about kind of the M&A opportunities on a go-forward basis, what's the right number that you all can kind of handle at a given time, given that the leverage rate is low and it looks like that the market is accelerating?

We're pretty comfortable we can do 2 to 3 acquisitions a year for the next 3 years and keep our leverage very low. And we're very comfortable with 2 to 3 a year.

And then lastly, you mentioned kind of the cranes and the earthmoving. Are you seeing a pickup in road construction activity as we're starting to kind of look forward to the 2018 building season?

Yes. It depends on the market. I do think there's been some pickup in activity there. That's not a big driver of our business. I mean, we get benefit, but I'd tell you, the demand we're seeing in the nonresidential construction markets is very, very broad-based. And so I wouldn't say that the highway stuff is a big driver of our business. We get some benefit, but the demand is very, very broad-based.

(Operator Instructions) Our next question comes from Steven Fisher from UBS.

Wondering if you could just talk about the difference between the 300 to 400 basis point improvement in time utilization with the just under 200 basis point improvement in dollar utilization. Is that difference related to mix of better utilization in smaller equipment versus less better utilization in larger equipment?

It's always impacted by mix. I mean, we -- in many times we talk about the economic headwind, as John said in his prepared statements, we have a very young rental fleet. So foreseeably, our average OEC is slightly higher than someone who has an older rental fleet. And I give you that example to say that it's always mix related, age of products, mix of products. But I would say that across the board, we've been happy with both the utilization and the rate improvement. If there's one product I would call out, we've called it out before, it was cranes from a disappointment from a pure rental rate standpoint. But I would also add that cranes had the highest sequential rate improvement in Q4. So they are both -- kind of across the board, we're seeing continued strength.

Okay. And I think John may have mentioned that there was some strength in crawlers in the quarter. What was driving that strength?

It's -- our -- the customers that we sold to in Q4 are typical types of customers, folks that work in both the industry and energy sector and in infrastructure. And some of the crawlers went to the larger regional crane rental houses who are traditional users of our products.

Our next question comes from Seth Weber from RBC Capital Markets.

Just, Leslie, I'm sorry if I missed it, but did you give any color as to what you think the tax rate will be going forward?

No, we didn't talk about it. But we're estimating 26% to 28% effective tax rate moving forward over the next couple of years.

Okay. And then just the slight decline in used equipment sale margin, is that just a function of mix or channel? Or was there something unusual there?

It's mix, Seth. It was completely mix.

At this time, I'd like to turn the conference back to John Engquist for any additional or closing remarks.

Now well, I appreciate everybody being on the call. I think you can tell we're in a solid environment, and '18 is going to be a nice year for us. And we look forward to talking to everybody again on our next call. Thank you for participating today.

This does conclude our conference for today. Thank you again for your participation. You may disconnect.